What Is Private Equity Real Estate
Private equity real estate refers to the pooling of funds, typically from institutional investors but also from others as we shall see, that are then used to purchase public and private commercial real estate assets. Institutional investors, having to deploy hundreds of millions of dollars, if not billions of dollars, simply dont have the bandwidth to be able to evaluate every single real estate deal that might be worthy of their investment.
Enter private equity funds, that sit between the large institutional investors and real estate sponsors with individual deals out in the market. These private equity funds charge a fee to their investors for managing the invested capital, usually between 1% and 2% a year, while also taking compensation based on performance.
The private equity funds primary role is to identify high caliber real estate sponsors, underwrite their deals, and invest in them on behalf of their institutional capital providers.
The impact of these changes is primarily at the lower to midrange of the investment scale i.e. up to around $50 million in deal size. Anything larger than that still remains typically in the private equity fund world, but even there so there are exceptions.
In short, private equity real estate is less about the real estate itself, and more about the way that real estate is financed.
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Why Start A Reit
REITs have more flexibility than equity crowdfunding or real estate syndication. You don’t have to raise capital for each individual deal and possibly miss out on deals because you can’t act quickly enough.
A REIT is an ongoing operation that can move in and out of investments to maximize the return. Investors essentially agree to trust you with your asset management abilities to give you more flexibility on how to best use the capital available. With a syndication, you have to sell investors on your vision and plan for each specific investment you want to make.
One of the most popular reasons to start a REIT is the tax benefits. A REIT isn’t usually taxed on the trust level. Instead, the investors are taxed on their dividends.
One of the main requirements of a REIT is that they have to pay out at least 90% of their taxable income as dividends. Notice I said “taxable.” Since depreciation is a major noncash expense used as a deduction for taxes, a REIT almost always pays out at least 100% of their taxable income. This leaves money in the REIT that isn’t taxed and can be used for other investments.
How Do You Admit Investors To Your Real Estate Fund
Once you have formed your real estate fund and determined your investment objective, you need to decide how you want to raise capital or accept investment. The two structures for this are known as open-ended and closed-ended funds.
In an open-ended real estate fund, investors are able to buy or liquidate shares during pre-determined periods of time throughout the life of the fund. How many of these periods there are and how long they last is determined by the fund manager. Open-ended funds offer more flexibility, but they also pose some unique challenges.
The ability for investors to get into and out of open-ended funds makes it difficult to value the private equity fund because share prices can fluctuate at times during what would normally be the hold period of an investment offering. So, if there is an out during a period where the real estate market is down, the value of an otherwise very solid fund could take a huge hit if too many shareholders make for the exit doors at the same time.
In a closed-ended real estate fund, there is a pre-set amount of time usually one to two years known as a commitment period during which the fund is raising capital and potential investors may buy shares in the fund. Once the commitment period ends, the investment offering is no longer available, and shareholders will not be able to liquidate their shares or pull money out of the fund until the end of the hold period.
- Type of assets in the fund
- Projected return
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Here’s Howfrom Buying Rental Property To Reits And More
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.
Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.
Is An Reit A Limited Partnership
A real estate investment trust is not a limited partnership, though they are treated similarly for taxation purposes. REITs and limited partnerships can both avoid double taxation due to their respective business structures. However, the two entities differ in most other ways, including their investment focus. While REITs are typically in the financial sector, limited partnerships focus most on energy or natural resources. Yet another difference can be found by looking at the distribution requirements for each: REITs must pay out 90 percent of their earnings. Limited partnerships, on the other hand, have targets, but they are not compulsory.
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The Power Of Leverage
With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. Leverage means to use debt to finance a larger purchase than you have the available cash for. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy orderunless you are buying on . And even then, the percentage you can borrow is still much less than with real estate, thanks to that magical financing method, the mortgage.
Most conventional mortgages require a 20% down payment. However, depending on where you live, you might find a mortgage that requires as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, the size of your mortgage affects the amount of ownership you actually have in the property, but you control it the minute the papers are signed.
This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage, or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.
The Investment Company Act
The Investment Company Act 1940 regulates investment company activities and sets industry standards with the purpose of protecting investors. Any investment company offering investors the opportunity to participate in open-end or closed-end mutual funds and investment trusts should understand and comply with this act.
Firstly, the act defines an investment company, describing the qualification requirements and exemptions. Any entity qualifying as an investment company must register with SEC before it can offer securities on the public market. Depending on the companys goals, targeted market, and other factors, it can be registered as one of the three legal structures: mutual fund, unit investment trust, or closed-end fund.
An entity should be engaged primarily in investing, reinvesting, and trading securities to qualify as an investment company. Certain companies can qualify for an exemption from SEC registration under the Investment Company Act section 3. The exceptions include companies that can prove they have no intention of making an initial public offering and only accept qualified investors. Qualified investors are defined under Section 2 of the Investment Company Act and must own no less than $5 million in investments.
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Vanguard Real Estate Etf
Vanguard Real Estate ETF has been around since 2004 and has over $39 billion in assets. When joining this REIT, you will have plenty of opportunities for wide-ranging real estate investment. There is also a steadier cash flow when it comes to Vanguard, as its a trusted name in the business.
When you join Vanguard, you have access to more than 160 real estate companies, and you have access to the entire funds portfolio. Vanguard is best for those looking for a real estate portfolio that can be passively managed.
Its best for people that want to invest but dont want to constantly monitor its performance. Their expense ratio is 0.12%, and they have a dividend yield of 2.96%.
We Assist Sponsors With An End
Most often, real estate investment funds are organized as Delaware limited partnerships. Investors in the fund typically make capital commitments in specific dollar amounts when they are admitted to the partnership. Each investor is then obligated to make capital contributions when called upon by the fund, that will generally be used for investments and to pay the fund’s expenses. Real estate investment funds can be very complex structures involving multiple uses of leverage, triggering rules of distribution, additional debt and equity investment funds, real estate investment trusts and other entities that can require creative and big-picture structuring. Fund managers should seek out competent legal counsel to assist in forming such investment funds to remain compliant and protect the sponsor, fund and investors from unnecessary liabilities.
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What Exactly Is A Reit
A REIT is a real estate investment company that owns or finances investment properties that produce income, distributing earnings to its investors in the form of dividends. In fact, a REIT has to distribute 90% of its taxable income to its investors.
There are two types of REITs: equity REITs and mortgage REITs. Equity REITs are what most people are familiar with. They invest in income-producing real estate. Mortgage REITs provide financing for real estate as well as buy existing mortgages.
Top 5 Benefits Of Starting A Real Estate Investment Business
The benefits that come with investing in real estate are nearly endless. Not only do you have to ability to make a sizable profit on every deal, but also, real estate is proving to be a solid hedge against the stock market and inflation. Some other benefits that are guaranteed to come with starting a real estate business include but are not limited to:
Tax Benefits. If you gross $100,000 per year at your nine to five job and I earn $100,000 per year from my rental property, who gets to keep more after taxes? You guessed it my rental property is taxed much lower because the government rewards rental property owners. The government also offers lower tax rates on long-term profits along with other benefits like depreciation and the exclusion of self-employment tax.
Cash Flow. Real estate investors can receive a substantial cash flow from steady wholesale or rehab deals, but they can also ensure themselves a secure monthly cash flow with rental property deals. The best part about rental property cash flow is that the extra money is considered a passive income after all of your bills are paid. You get to collect a monthly paycheck while managing the rest of your investing business.
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How To Start Your Own Private Equity Fund
Private equity firms have been a historically successful asset class and the field continues to grow as more would-be portfolio managers join the industry. Many investment bankers have made the switch from public to private equity because the latter has significantly outperformed the Standard & Poors 500 Index over the last few decades, fueling greater demand for private equity funds from institutional and individual accredited investors. As demand continues to swell for alternative investments in the private equity space, new managers will need to emerge and provide investors with new opportunities to generate alpha.
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How Do I Establish A Property Fund
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Finding Investment Property For Sale
Finding real estate investment property alone will take weeks of online searching, site visits and negotiation. I used to spend a couple hours a week talking to different real estate agents and brokers just sourcing deals.
The internet and real estate crowdfunding has made the process a lot easier. I would suggest assigning each person in your real estate investment group a different website to follow for deals unless they have another specific talent like legal or investment analysis.
On Streitwise, you find the investment offers by clicking Explore Investments. Investments are either Preferred Equity, Equity or Debt.
Each investment offers detailed information on the property, financials, a market summary, overview and management as well as a download of documents. Most investments come with all the analysis youll need to make your decision but make sure you back it up with some of your own research.
Active Vs Passive Property Partnerships
Partnerships can be structured in a number of creative ways that suit the needs of each individual involved. There are two key types of partnerships: active and passive partnerships.
In an active partnership, each member takes on a part of the workload and has an active role in contributing to projects on a regular basis. All tasks could be split up equally, or perhaps tasks could be split up based on each members level of experience and skillset. However, the idea is that each person involved in the partnership is putting in a direct effort into the collective work.
Alternatively, one or more members could be a silent partner. This means that they are providing capital to fund a project instead of actively participating, thus the name passive partnership. A real estate investor could raise capital from partners who want to reap the financial benefits of investing in real estate without having to directly involve themselves in a project.
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Reits Vs Real Estate Funds Key Differences:
The primary differences between REITs and Real Estate Funds are:
- Income REITs must distribute at least 90% of the income from their properties to investors each year thus, REITs are seen as income-generating investments. Real estate mutual funds usually pay a dividend, but also seek to provide returns from an increase in the value of the funds properties.
- Trading/Liquidity REITs trade like stocks, and thus can be bought and sold throughout the day. Real estate mutual funds trade at the end of the day, but are still quite liquid. Private equity real estate funds are illiquid investors commit to having their capital locked up for a number of years, which is one reason these funds may offer superior returns.
- Taxation REITs distribute dividends that are taxed as ordinary income. Returns from owning real estate funds come primarily from an increase in value of the assets in the fund, which may be taxed as capital gains. For real estate funds that hold shares of REITs, income distributed from those REITs is eligible for a pass-through deduction called Qualified Business Income , lowering the taxes owed on that income.
Featured Real Estate Partners
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Types Of Real Estate Investment Funds
There are four types of funds available to choose from. These are:
1. Real Estate Mutual Funds
Real estate mutual funds are entities that collect funds from investors. They do so to invest the combined capital in diversified real estate opportunities. Like other mutual funds, they are managed by professionals. These entities invest in the bonds and stocks of established real estate companies and also purchase properties.
Real estate mutual funds are open to all investors who can afford the minimum capital share. These funds are a good venture for small investors looking to diversify their passive income.
2. Real Estate Private Equity Fund
Real estate private equity funds are created by a general partner and get funding from limited partners. The general partner identifies investments for the partners and does the management. Private equity funds target high net worth investors and institutional investors. They are not available to the general public.
3. Real Estate Debt Fund
Real estate debt fund firms collect money from investors, and the money is lent to prospective real estate developers or buyers on interest. Investors in debt funds earn from the interest acquired from the loaned money. Just like private equity funds, debt fund firms target large investors.
4. Real Estate Investment Trust
